Sunday, October 26, 2014

I'm taking a short break. I expect to post again on Sunday, November 2.

Update Oct. 27, 2014:

Here's why I missed posting this week. I've been helping to publicize a new report by the Post Carbon Institute that takes aim at the Energy Department's rosy forecasts for tight oil and shale gas. That report is now available.

(Full disclosure: I was a paid consultant for this publicity campaign. But, as my readers know, I've been saying for several years that the tight oil and shale gas boom would be short-lived. This report offers a broad and detailed analysis that supports that view.)

When the world's business editors sent their reporters canvassing to find out what is behind the recent plunge in the world oil price, they were doing what they do almost every day for every type of market: stocks, bonds, currencies, commodities and real estate.

In financial journalism more often it's the price that makes the story rather than the story that makes the price. If a story is about something very surprising which almost no one can know in advance--a real scoop--say, an unexpected outcome in a major court case affecting a company's most profitable patent, then the story will move the price of the company's stock.

But much more often prices move, and then business editors send their reporters to find out why. Usually, a number of financial and industry professionals are asked: Why do you think prices went up/down? Then, the story is written and published.

However, on a daily basis, unless there is a big and obvious story like the one above, the only true answers are these:

There were more buyers than sellers. (UP)
There were more sellers than buyers. (DOWN)

These answers, of course, aren't really news. They are more like axioms.

The answers for the recent swoon in the oil price include:

Oil is purchased in dollars and the dollar has been rising which puts downward pressure on the oil price.

Demand is declining in Asia and Europe which is leaving excess oil on the market driving down the price.

Growing production from the United States is adding to world oil supplies and bringing the price down.

Libyan production has rebounded sharply following the country's recent period of unrest.

Saudi Arabia, the only OPEC producer with significant additional production capacity, is pumping more oil to punish other OPEC members with a low price, a move designed to restore discipline among members so that they will abide by future oil production quotas.

Saudi Arabia is pumping more oil to bring the price down to aid the United States in its diplomatic objectives, pressuring Russia, the world largest oil producer.

Saudi Arabia isn't trying to help the United States; the kingdom is actually trying to hurt the United States and restore the exporter's dominance in the oil market by crushing the U.S. tight oil boom which requires high prices to be profitable.

No, Saudi Arabia is really trying to help the United States in its fight against ISIS by showing its support for the United States and Europe through lowering oil prices and by making the price that ISIS gets for the oil products it now controls lower. The lower price is also harder on Iran which requires high prices to sustain its government revenues.

Saudi Arabia is simply trying to defend its market share in the face of waning demand by continuing to pump oil at current levels and offering discounts to customers.

Of course, the above answers aren't necessarily mutually exclusive. People and countries can have multiple objectives served by the same action. And, some or all of the above assessments could be wrong or at least of very little explanatory value.

Now, I'll weigh in. It seems entirely likely that the Saudis are being opportunistic. Like many oil exporters, they need high oil export revenues to pay for their government expenditures, much of which consists of food and fuel subsidies and social programs designed to keep the public docile. In the face of what looks like declining demand, rather than cut production to maintain prices as they have done in the past, they've decided to maintain their market share worldwide by cutting prices. This has the benefit of making much American tight oil production uneconomic, thus discouraging new drilling.

The Saudis know something very important about the U.S. tight oil drillers. Most of them are independents who are loaded with debt and don't have the financial wherewithal to weather a period of sustained prices below their cost of production. They will quickly reduce their drilling to only those prospects which seem as if they might be profitable at these new lower prices.

That will pave the way for sustained higher world prices later as growth in U.S. oil production comes to a halt. After the damage is done, the Saudis will try to bring the price back up.

It's always possible that the Saudi strategy will fail because what's really happening may be the first stages of a colossal economic and financial crash that will take the world economy into prolonged recession. That would bring the price of oil down to levels not seen in a decade where they might stay for a considerable period.

I'm not predicting that. And, in fact, none of what I've written may have any validity. Even though the Saudis have publicly stated that they are defending their market share, they may not be telling us exactly what their aims are. Saudi acquiescence to lower oil prices may simply be having consequences the Saudis don't intend, but can't avoid.

In truth, the whole issue of oil prices is too complex and too lacking in transparency to be discussed intelligently when it comes to short-term price movements. I am reminded of the tale of the blind men and the elephant of which the last stanza of a poetic version is quoted above.

But, as I say, price makes the story.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 12, 2014

I've been advancing a thesis for several months with friends that World War III is now underway. It's just that it's not the war we thought it would be, that is, a confrontation between major powers with the possibility of a nuclear exchange. Instead, we are getting a set of low-intensity, on-again, off-again conflicts involving non-state actors (ISIS, Ukrainian rebels, Libyan insurgents) with confusing and in some cases nonexistent battle lines and rapidly shifting alliances such as the shift from fighting the Syrian regime to helping it indirectly by fighting ISIS, the regime's new foe.

There is at least one prominent person who seems to agree with me, the Pope. During a visit to a World War I memorial in Italy last month Pope Francis said: "Even today, after the second failure of another world war, perhaps one can speak of a third war, one fought piecemeal, with crimes, massacres, destruction."

In citing many well-known causes for war, he failed to specify the one that seems obvious in this case: the fight over energy resources. It can be no accident that the raging fights in Syria, Iraq, Libya, and the Ukraine all coincide with areas rich in energy resources or for which imported energy resources are at risk. There are other conflicts. But these are the ones that are transfixing the eyes of the world, and these are the ones in which major powers are taking sides and mounting major responses.

In the Ukraine natural gas supplies lurk in the background as rebels (supposedly with Russian help) fight to separate parts of eastern Ukraine from the country. The Russians who hold one of the largest reserves of natural gas in the world have threatened to cut off Ukraine, a large importer, this winter and to curtail supplies to Europe which depends on Russia for about 30 percent of its gas. The threat against Europe is in response to trade sanctions levied on Russia for its alleged role in helping Ukrainian insurgents.

Since summer, a friend and I have been periodically reviewing the World War III game board to assess whether the war is heating up or cooling down. The temperature changes as we have gauged them would look like a sine wave on a graph revealing no definitive trajectory. And, that is just the kind of war that I believe World War III will be--years of indecisive battles, diplomatic ploys, half-hearted engagement by major powers, and new, unexpected conflicts arising in unexpected places.

There are, of course, many other reasons for the conflicts I cite. But I wonder if the major powers would be much engaged in these conflicts if energy supplies were not at stake. So, the resource wars that are developing, especially those relating to energy, are not about direct conquest so much as concern about access to energy resources, or to put it more clearly, concern about possible interruptions to the flow of energy resources.

The low-intensity confrontation in the South China Sea between China and its neighbors, Vietnam and the Philippines, is the most prominent dispute over actual ownership of energy resources rather than the mere flow of those resources. But in the article cited, the Indians, while laying no claim to resources in that area, have said publicly that they are worried that shipping through the South China Sea could be affected if the conflict heats up. Again, we are back to concern about the flow of resources by countries not directly a party to the dispute--yet.

Traditional diplomacy among great powers does not seem to have been effective at resolving these conflicts. And, traditional military operations seem less than effective as well. Kurds in Syria report that U.S. airstrikes against ISIS are not working. This conflict and others like it which are characterized by poorly defined boundaries, shifting participants and unclear goals are confounding major powers and wreaking havoc on countries where these conflicts rage.

One of the most obvious strategies for responding to these conflicts--deep, rapid and permanent reductions in fossil fuel energy consumption through efficiency measures, conservation, and expansion of renewable energy--does not seem to be a prominent part of the policy mix. Such a reduction would not necessarily cause these conflicts to disappear; but they might become far less dangerous since the major powers would be less interested in them and thus less likely to make a miscalculation that would lead to a larger global conflict.

That is the danger that lies in my version of World War III--that it could morph into the kind of global conflict that risks nuclear confrontation between major powers--not because those powers would seek such an obviously insane outcome, but because they might miscalculate and by mistake push the conflict in this terrible direction.

It is not clear how this danger can be avoided given the current trajectory of world energy use. And, it is not clear how to get the world's leaders to focus on the obvious need to reduce not only fossil fuel energy use, but use of all the world's nonrenewable resources in order to forestall conflict.* That humans can have good lives without perpetual growth in the consumption of resources is simply not a possibility in the minds of most world leaders. And that means we should prepare for a very long World War III.

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*Such reductions imply the reorganization of our daily lives with an emphasis on conservation as an ingrained habit. They also imply significant changes to our infrastructure. But they do not necessarily mean that we cannot have the essential services that the current system provides while using far less in the way of inputs. The main impediments to moving rapidly down this road are vested interests such as the fossil fuel industry which profit from the current wildly inefficient and wasteful global system. I agree that this is no small obstacle.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Conceptually, the battle is over. The peakists have won. I was sitting next to an oil executive in New Mexico just recently, and he said to the audience, "Of course, I'm a peakist. We're all peakists. I just don't know when the peak comes." But that represents part of a conceptual victory. And, therefore to the peakists I say, you can declare victory. You are no longer the beleaguered, small minority of voices crying in the wilderness. You are now mainstream. You must learn to take yes for an answer and be gracious in victory.

Some five years ago in Italy, I concluded a talk by saying that like the inhabitants of Pompeii, who ignored the neighboring volcano Vesuvius until it detonated, the world ignores peak oil at its peril.

Naturally, Yergin completely ignored the contradiction between his views and Schlesinger's in accepting the award from the U.S. Department of Energy. But, it is difficult to understand just exactly how Yergin contributed to American energy security. This is the man who throughout the last decade kept predicting a flood of new oil that would send oil prices plummeting. That flood never appeared. Because of his vast influence, Yergin led a chorus of voices telling the United States and the world that there was nothing to worry about, that we didn't need to prepare for an era of constrained oil supplies and high oil prices. And, this is the foresight that has earned him a national award from the Energy Department for aiding our energy security?

In the news piece cited above Yergin behaves as if he foresaw the shale boom in oil and natural gas in the United States. But, back in 2003 in an article for "Foreign Affairs," he advocated a vast expansion of import capacity for liquefied natural gas (LNG) in the United States because "[i]n the next five years, it is likely to become a large gas importer; within ten years, it will overtake Japan as the world's largest." I'm not sure how this gem would have helped U.S. energy security either. To show that it was taken seriously, the Congressional Research Service in a report to Congress cited Yergin's article as evidence of the need to expand U.S. LNG import capacity.

So, on oil Yergin got it wrong, way wrong. On natural gas he got it wrong, 180 degrees wrong if we take his current position as a guide. Today, Yergin is touting the need to prepare to EXPORT U.S. natural gas to the rest of the world. This is no surprise since it is the position of his clients in the gas industry who would benefit from the higher prices available on the world market for gas. But, it seems quite obvious that exporting U.S.-produced natural gas would detract from, not enhance American energy security, a fact that is apparently lost on the Energy Department.

When oil was vaulting toward its highest price ever in mid-2008, Yergin felt he had to say something, and what he wrote for the "Financial Times" was essentially an explanation of why he believed he had so badly botched his previous calls. Suddenly, he was advocating energy efficiency and biofuels. He foresaw oil losing some of its dominance as transportation fuel. He also did an about-face on oil prices and for the very first time in the decade forecast RISING oil prices.

What we see then is a man who tries to save face when events show him to be embarrassingly wrong and who shills for the industry he represents the rest of the time. But all of the time the media and public treat him as if he were a disinterested party, only concerned about national and international well-being, an independent analyst who is in thrall to no one.

However, Yergin's company, Cambridge Energy Research Associates (later acquired by IHS, Inc.), has always had major oil companies as clients. Even so, pronouncements from Yergin are not worthless. Rather, they should be viewed as a barometer of thinking in the oil industry. And, anything Yergin says which seems contrary to or, at least, beyond the interests of that industry is meant to maintain his image as an independent analyst, an image that was never consistent with his actual consulting work.

Daniel Yergin is a talented storyteller. He won the Pulitzer for his history of oil entitled The Prize. At any given moment, however, it's important to understand what story he is telling and on whose behalf he is telling it. That he is little concerned with anyone's security except that of his clients is obvious from his previous public statements and his long career of carrying water for the oil and gas industry.

Given all this, perhaps the most puzzling thing about Daniel Yergin is his mystifying ability to inflict amnesia on people regarding his previous pronouncements and predictions. It is this ability, it seems, that has made it possible for him to thrive as a consultant (despite his abysmal forecasting record) and to be the first recipient of an award, the Schlesinger Medal for Energy Security, named after a man whose views on the future of oil are very much the opposite of Yergin's.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.